Ch 05 - Chapter 5: Measuring GDP and Economic Growth An...

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C h a p t e r   5 :   M e a s u r i n g   G D P   a n d   E c o n o m i c  G r o w t h An Economic Barometer A. What exactly is GDP and how do we use it to tell us whether our economy is in a recession or how rapidly our economy is expanding? B. How do we take the effects of inflation out of GDP to compare economic well-being over time and how do we compare economic well-being across counties? O u t l i n e I. Gross Domestic Product A. GDP Defined 1. GDP   or Gross domestic product , is the market value of all final goods and services produced within a country in a given time period. 2. GDP is a market value—goods and services are valued at their market prices. a) To add apples and oranges, computers and popcorn, we add the market values so we have a total value of output in dollars. 3. GDP is the value of the final goods and services produced. a) A final good (or service), is an item bought by its final user during a specified time period. b) A final good contrasts with an intermediate good (or service), which is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service. c) Excluding intermediate goods and services avoids double counting . 4. GDP measures production within a country— domestic production. 5. GDP measures production during a specific time period, normally a year or a quarter of a year. B. GDP and the Circular Flow of Expenditure and Income 1. GDP measures the value of production, which also equals total expenditure on final goods and total income. 2. The circular flow diagram in Figure 5.1 illustrates the equality of income, expenditure, and the value of production. 3. The equality of income and output shows the link between productivity and living standards. a) The circular flow diagram shows the transactions among four economic agents— households, firms, governments, and the rest of the world. b) The circular flow diagram also shows the three aggregate markets—goods markets, factor markets, and financial markets.
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4. Households and firms interact in two markets. a) In factor markets households receive income from selling the services of resources to firms. The total income received is aggregate income . It includes wages paid to workers, interest for the use of capital, rent for the use of land and natural resources, and profits paid to entrepreneurs; retained profits are part of household income, lent back to firms. b) In goods markets households buy and firms sell goods and services that firms produce. The total payments made by households for these goods and services is consumption expenditure , C . c) Some firms sell, and others buy, capital goods in the goods market. Output produced but not sold is added to inventory. The purchase of new plants, equipment, and buildings and the additions to inventory are investment , I . 5.
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Ch 05 - Chapter 5: Measuring GDP and Economic Growth An...

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